Ten years after Chapter 9 filing, Vallejo looks ahead

A decade after Vallejo, Calif. entered bankruptcy, the city appears to have turned a corner.

“Vallejo has done a ground-up restructuring,” said Karol Denniston, a partner with Squire Patton Boggs LLP. “They are now routinely one of the top 10 cities where people want to live, which is a huge turn-around from when they entered bankruptcy.”

Scars still remain from the Chapter 9 bankruptcy process. And many of the city's markers of success in 2018, as with the troubles that drove the city into bankruptcy court in 2008, stem from economic factors beyond its control.

Credit partly goes to the exorbitant real estate prices in San Francisco, where the median house sells for $1 million.

“We are benefiting from the fact that people would rather spend an hour riding the ferry to San Francisco then sitting in their car commuting,” said James Cooper, president and chief executive officer of the Vallejo Chamber of Commerce.

Prices have also jumped in communities like Oakland that once offered affordable alternatives, pushing buyers further out.

Vallejo, about 30 miles north of San Francisco, had a population of 118,280 as of June 2017, making it the tenth most populous city in the Bay Area, according to its 2017-18 comprehensive annual financial report.

Though Vallejo is dogged by a reputation for high unemployment and crime, as well as its historic bankruptcy, realtor.com named it the nation's hottest housing market in 2016.

The median listing price in Vallejo has grown to $420,000 in April 2018 from $290,000 in May 2015, according to realtor.com.

“Prices have probably grown by 25% in the starter home category in the last two years; and we have seen prices rising by 7% to 9% for the past several months,” said Johnny Walker, president of the Solano Association of Realtors.

Denniston credited city leaders for turning around the relationships with its police and fire employees, which were fractious heading into the bankruptcy.

“It looks like someone was able to improve those relationships,” Denniston said. “You have to bring the employees and the taxpayers along at the same time to reach a good consensus on financial goals.”

Vallejo filed for Chapter 9 bankruptcy on May 17, 2008, claiming it could no longer afford to pay wages and benefits promised to its employees.

"Vallejo was the first case in which a judge said I can allow the debtor to break or reject collective bargaining agreements," said Robert Christmas, a Nixon Peabody partner. "I think that set the tone in terms of making public service unions more willing to bargain."

Finance Director Ron Millard presented a structurally balanced $105 million budget to the City Council Wednesday night for the fifth year in a row. The city has grown reserves to 17.3% or close to $18 million, said Joanna Altman, a Vallejo spokesperson.

Following the bankruptcy, city leaders employed a combination of austerity measures that included cutting police and fire services to the bone, tax increases and economic development measures.

It took some time for the changes to take hold, fueling reports as recently as 2013 that the city could end up back in bankruptcy.

“I don’t consider a three and a half-year window as taking a long time to recover,” Cooper said. “Bankruptcies are like marriages, they are all unique in their own ways.”

He points to the growth in police numbers, city efforts to improve streets and lighting and efforts to redevelop a shuttered Navy base as evidence of changes occurring.

“We had been known for having a tumultuous city government, but they are working more collaboratively,” Cooper said. “The changes in the last five years have had tangible benefits. I think the message got out that we are looking to do business; and we have had much more interest from the development community.”

Police positions grew to 109 sworn and 38 civilian positions in 2015 from 92 sworn and 29 civilian in 2011, according to a report on the police department’s website.

Voters approved Measure B, a one-cent sales tax, in November 2011 and then renewed the tax under a renamed Measure D in November 2016. The measure adds between $14 million and $15 million annually to city coffers, Altman said.

The sales tax was enacted to increase the ranks of police and firefighters and other services lost through the bankruptcy, and to build the reserve fund, Altman said.

The seafaring town that grew up around the Mare Island Naval Shipyard fell on hard times when the 142-year-old base closed in 1996. Job losses resulted in people moving out of the area.

A long, downhill slide began with ancillary businesses closing leading to double-digit unemployment and high crime rates – and eventually bankruptcy.

Lennar Mare Island, LLC was selected four years after the base closed to redevelop the 5,000-acre parcel into 7 million square feet of commercial and industrial space, 1,400 homes and recreational uses.

Different aspects of the base fall under different levels of historic preservation designations, which made redevelopment somewhat challenging, according to Ed Mozer, a spokesman for Lennar Mare Island.

Lennar Mare Island is separate from Lennar Homes, one of the home builders the master developer has been working with to build homes.

Home builders have built 300 of the 1,400 single-family homes, townhomes and duplexes planned, Mozer said. Businesses on Mare Island include Factory OS, an Oakland-based modular apartment company that celebrated the grand opening of its 250,000-square foot space on Tuesday. Savage & Cooke, a whiskey and tequila distillery, opened a year ago.

Dave Phinney, the owner of Savage & Cooke, and Gaylon Lawrence Jr. formed a consortium called the Nimitz Group that beat out eight other applicants in a city request-for-proposal process to develop 157 acres on the north side of Mare Island, a parcel separate from the naval base, into Class A offices and specialty retail.

In 2017, the regional ferry system added a Mare Island stop to the Vallejo-San Francisco ferry route.

"The progress in Vallejo, especially around Mare Island, makes me proud," said Mayor Bob Sampayan in a statement. "The level of commitment to invest in Vallejo is both incredible and humbling."

A key question for Vallejo is whether the dark cloud of pension liabilities looming over the economies of even the most robust California cities could derail everything the city has accomplished.

The changes enacted in Vallejo give the city a better shot than most to deal with its pension liabilities, Denniston said.

A report published by Joe Nation of Stanford Institute for Economic Policy Research in October painted a stark picture for many cities, including Vallejo. Nation conducted case studies forecasting increased contributions required through changes the California Public Employees’ Retirement System had made to reduce its assumed rate of return on investment.

His report said Vallejo’s contributions reached $24.7 million in fiscal 2017-18 – almost five times the 2003-04 amount.

By 2029-30, Nation’s projections show Vallejo's pension contributions growing to $52 million under a baseline projection, and $60 million under an alternative projection, to consume from 23.7% to 27.3% of the city’s operating expenditures, which could crowd out public services.

Nation’s case study says Vallejo could be faced with making 24% reductions in police and fire expenditures or more than 8% across-the-board budget cuts when it hits that 10-year mark.

One thing that Denniston said has changed since Vallejo declared bankruptcy is that cities are looking much further ahead.

“There has been a huge education process since Vallejo filed for bankruptcy with cities looking much further down the runway about how to manage cash flow challenges,” she said.

Vallejo is not unique; many California cities are facing increased pension liabilities as a result of CalPERS changes, Altman said.

“We are looking out five or 10 years, so we are definitely preparing,” Altman said.